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CEPT University, Ahmedabad
Strengthening
Finances of Urban Local Bodies
Meera Mehta
Dinesh Mehta
Presentation for the Fourteenth Finance Commission
the measures needed to augment the consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State
the need for insulating the pricing of public utility services like drinking water, irrigation, power and public transport from policy fluctuations through statutory provisions
The Commission may review………; linking outlays to outputs and outcomes; ……………………….. and make appropriate recommendations thereon
TOR of the Fourteenth FC relating to ULB
Need to focus on ULBs Status of ULB finances Property tax User charges Measures to improve municipal finances
Information system for outcomes – service levels in ULB
Suggestions for the FFC
Outline
Urbanising India
Where are the cities of the world?
Globally, more people live in urban areas than in rural areas, and this is likely to be the case in India as well by 2030.
Delhi with 25 million is the second largest urban agglomeration of the world. (UN, 2014)
The urban sector contributed about two-thirds of GDP in 2009-10 and this share is likely to increase to 75 percent by 2031 (HPEC 2011).
Successful sustainable urbanization requires adequate investment in infrastructure and significant capacity at local level to operate and maintain the infrastructure.
Contribution of urban areas to GDP
India’s Urbanisation: acceleration in 2011?
90 million added in Urban and Rural areasBhagat, (2011), Urbanisation in India, EPW, August 20, 2011
There is also rapid urban expansion that exacerbates the need for infrastructure investment
State allocation for Urban Development
Gujarat UDD Budget : Highlights
Source: State Budgets Documents, GoG
Budget Allocation in UDD (Rs in Millions)2005-06 (Actual)
2006-07 (Actual)
2007-08 (Actual)
2008-09 (Actual)
2009-10 (Actual)
2010-11 (Actual)
2011-12 (RE)
2012-13 (BE)
UDD Budget 6,611 15,054 22,333 40,939 47,810 49,118 48,214 66,782Central Scheme/Programme
(Fully/Partially)270 5,876 5,993 8,620 8,008 8,900 5,477 7,059
State Scheme/programme 694 1,181 2,076 6,782 13,593 13,532 9,164 21,666
Formula Linked Grant (inclOctroi compensation)
4,193 5,183 11,514 22,275 23,387 23,411 24,191 25,077
Others 1,454 2,814 2,750 3,263 2,822 3,275 9,381 12,980
63%
34%
52% 54%49% 48% 50%
38%
0%
10%
20%
30%
40%
50%
60%
70%
2005-06(Actual)
2006-07(Actual)
2007-08(Actual)
2008-09(Actual)
2009-10(Actual)
2010-11(Actual)
2011-12(RE)
2012-13(BE)
Formula Linked Grant to ULBs % of Total UDD Budget
21% 23%
69%85% 81% 82% 81% 80%
79% 77%
31%15% 19% 18% 19% 20%
0%
20%
40%
60%
80%
100%
120%
2005-06(Actual)
2006-07(Actual)
2007-08(Actual)
2008-09(Actual)
2009-10(Actual)
2010-11(Actual)
2011-12(RE)
2012-13(BE)
Formula Linked Grant to ULBs: Municipal Corporation V/S Municipality
Municipal Corporation Municipalities
Maharashtra UDD Budget : Highlights
Source: State Budgets Documents, GoM
Budget Allocation in UDD (Rs in Millions)2005-06 (Actual)
2006-07 (Actual)
2007-08 (Actual)
2008-09 (Actual)
2009-10 (Actual)
2010-11 (Actual)
2011-12 (RE)
2012-13 (BE)
UDD Budget 14,020 19,283 26,062 27,524 48,276 42,971 51,291 51,626Central Scheme/Programme
(Fully/Partially) 2,528 5,800 14,300 17,260 22,393 18,975 22,350 23,326
State Scheme/programme 6,868 6,351 5,886 4,139 16,680 20,243 23,179 20,380
Formula Linked Grant 4624 7132 5876 6125 9203 3753 5762 7,920
3337
23 2219
911
0
5
10
15
20
25
30
35
40
2005-06(Actual)
2006-07(Actual)
2007-08(Actual)
2008-09(Actual)
2009-10(Actual)
2010-11(Actual)
2011-12(RE)
Formula Linked Grant to ULBs % of Total UDD Budget
2.5 2.2 2.5 2.4 1.5
41.4 42.3
97 98 98 98 98
59 58
0%10%20%30%40%50%60%70%80%90%
100%
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
Council Corp
Formula Linked Grant to ULBs Municipal Corporation V/S Municipality
Sources of funds for Urban Water and Sanitation
0
20
40
60
80
100
2005–06 2006–07 2007–08 2008–09 2009–10 2010–11
Perc
ent
Sources of Funds for UWS: Gujarat
ULBs State Government Central Government
0
20
40
60
80
100
2005–06 2006–07 2007–08 2008–09 2009–10 2010–11
Perc
ent
Sources of Funds for UWS: Maharashtra
ULBs State Government Central Government
Level of predictability in fundingLevel of autonomy for ULBs in the use of
funds Reform and performance-linked funding Funds earmarked for the poor Disparities between Municipal
corporations and smaller municipalities
Aspects of decentralisation
Fiscal decentralisation(state to local): a cause for concern
Dimension ofdecentralisation
Central Govt.funds
State Govt.funds
TotalUrban
Dev Funds
Central Govt.funds
State Govt.funds
TotalUrban
Dev Funds
Predictability% share of formula based funds
11.4 23.6 16.4 8.5 31.3 20.5
Local Autonomy% share of partially tied funds
62.8 81.26 56.02 73.9 89.5 81.5
Reforms Linked% share of reform linked funds
82.5 10.3 60.1 93.0 12.4 42.1
Earmarking for the poor% share of fundsearmarked for the poor
22.8 7.5 18 23.8 11.5 16.1
Horizontal Equity% share of MCs
% share of Municipalities
83
17
73.4
26.6
81.28
18.72
83.1
16.9
35.4
64.6
60.0
40.0
Maharashtra Gujarat
Municipal Finance
No systematic information on ULB finances exists in India. Most available studies are “one-off”, based on a “sample” of ULBs, often with a bias for larger cities.
What we do know is that the share of “own revenue” is declining and dependence on “grants” (tied and untied) is rising, thus undermining one of the basic tenets of decentralisation
Expenditure needs of ULBs are generally based on financial norms (based on Zacharia 1964 norms adjusted for inflation)
No information on “outcome” of this expenditure in terms “service levels”
Do we know enough about the ULB finances?
Gujarat and Maharashtra: Issues in assessing Municipal Finance
ULBs are required by law to have a balanced budget – butin practice, they overestimate revenues and underspendon essential services
Many ULBs follow unified or single budget formats inwhich segregation of revenue and capital expenditure isdifficult
The BPMC Act provides for separate budgets or ringfencing some part of budget but this is not practiced inMaharashtra
Inconsistent municipal budgeting and accountingstructure
Difficult to assess the debt repayment capacity
Increasing dependency of ULBs
Source: ADB (2011), India Municipal Finance Study, available at http://www.adb.org/projects/documents/municipal-finance-mattersindia-municipal-finance-study-tacr
Gujarat ULBs :Dependency on GrantsOwn Source revenue (Tax income) to total revenue
Class Average Median < 20% 20 – 30% 30 – 40% 40 – 50% 50 – 60% > 60%A (18) 36% 34% 2 6 3 3 3 1B (33) 43% 31% 5 10 8 5 0 5C (45) 26% 22% 17 11 4 4 2 1D (63) 42% 29% 15 15 10 4 6 9
Total (159) 37% 28% 39 42 25 16 11 16
ULB class
Property tax
Special water tax
General water tax
Drainagetax
Special safai tax
General safai tax
Light tax
A 668 600 600 200 100 91 100B 523 600 600 225 100 96 68C 453 600 150 225 60 60 53D 332 600 75 175 60 60 50
Median values of taxes/per property levied by Municipalities(not all ULBs levy all these taxes)
ULBs generate only about one-third of their income from own sources The primary reasons for low dependence on taxes:
1. Low tax rate2. Low collection efficiency
Maharashtra: Property tax - is there potential for more?
51 65 71 98
141 163 175 178 184
200
246
290
373 380 403
-
50
100
150
200
250
300
350
400
450
-
500
1,000
1,500
2,000
2,500
3,000
Property tax / property Per capita property tax
Year: 2009-10
• ULBs have adopted different property tax rates, infrequent revision of property tax
• Non -coverage of properties under the property tax net
• Low demand and poor collection efficiency of the property tax by the ULBs
Gujarat Property tax: Collection Efficiency
Class Median
Number of ULBs according to Collection Efficiency of Property tax
< 40% 40 – 55% 55 – 70% 70 – 85% > 85%
A (18) 65% 0 5 5 4 4
B (33) 76% 0 5 4 13 7
C (45) 71% 4 6 11 16 8
D (63) 58% 13 13 19 6 12
Total (159) 68% 17 29 39 39 31
UIDSSMT and MMSVY -Reforms target mandate that ULBs collect 90% of the demand raised only 31 cities meet the reform target. 46 cities collect less than 55% of the demand raised Critical in class D cities, more than half collect less than 60%
Property Tax: an underutilised resource
Prakash P (2013): Property taxes Across G20 countries: Can India get it right? Oxfam India working papers series January 2013
Property Tax Comparison
Prakash P (2013): Property taxes Across G20 countries: Can India get it right? Oxfam India working papers series January 2013
User charges/taxes
Cost recovery in Water in ULBs
8488
7178 74
60
7781
69
81
61 63
0
100
State MC A B C NP
Maharashtra
4852
43 4537
4951
37
68 65 6773
0
100
State MC A B C NP
Gujarat
2010 2011 2012 2013
ULBs in both the states do not fully recover O&M costs (billed demand/ O&M expenditure) of provision of water services
Maharashtra is better in cost recovery of water
No major change in trend despite conditions imposed by centre (JnNURM) and State
Collection Efficiency of User charges (Water)
69 7168 64 63 6363
68
50 5458
53
0
90
State MC A B C NP
Maharashtra
60 61 63 61 60
49
62 65
51
65 6358
0
90
State MC A B C NP
Gujarat
2010 2011 2012 2013
Actual Cost recovery is further lowered as ULBs fail to collect all the demand raised.
ULBs in both states collect only about 60% of the demand raised
Can ULBs sustain infrastructure?
64%
47%
0% 20% 40% 60% 80% 100%
Gujarat
Maharashtra
Percent
Recovery of O&M Costs through local taxes and charges
Note: Actual O&M expenditures are compared with HPEC norms
24%
15%
29%
34%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Municipal Corporations Municipalities
Actual O&M Expenditure as % of Required Expenditure
Gujarat Maharashtra
Obsession about computing the need for investment in urban infrastructure (HPEC, McKinsey, etc)
Even when major investments in urban infrastructure (funded by Central and State) are made, ULBs are nether able to recover the O&M expenses through local charges and taxes for services
Linking outlays to outcomes
The Commission may review………; linking outlays to outputs and outcomes; ……………………….. and make appropriate recommendations thereon
In an earlier study it was observed that, “the study would have been more complete if the outcomes in terms of finances of the cities could be related to the levels of service delivery. Unfortunately, none of the ULBs have a systematic record on the levels of services provided. In the absence of data on the levels of services for each ULB, we cannot use the physical norms to assess the conditions but have to rely entirely on financial norms.”
Source: Bandopadhyay and Rao (2009), NIPFP working paper
Linking outlays to outputs and outcomes
It is possible to implement monitoring of outcomes for key services – water supply, Sanitation, Solid Wastes Framework of Service Level Benchmarks (SLB) developed
by Ministry of Urban Development has been in use since 2009
CEPT University has operationalised this framework with online system and which collects annual information for 400+ cities in Gujarat and Maharashtra
Both states have institutionalised the system of annual monitoring of SLBs with help of CEPT University and partners
Ministry of Urban Development has suggested to state governments to adopt this framework
Monitoring outcomes in ULBs
PAS Annual Service delivery
profile for 419Cities in 2 States
Focus on Measurement, Monitoring & Improvement
covering 32Key indicators and
www.pas.org.in 88 local action indicators
Sectors : Water supply, Waste Water, Solid waste Management & Storm Water
Performance Assessment System
Old city area
Newly developing
l i
Online Monitoring
State profile of all SLBs
Overview of all cities City profile of all SLBs
Documentation of good practices
On-line data entry module
Online Module for Municipal Finance – Gujarat
Format Showing Revenue/Capital Expenditure of ULB
Format showing income details of ULB
STATE
CITY
CITYDetails
Maharashtra Data Reliability Analysis
0
5
10
15
20
25
30
Nav
i Mum
bai
Pim
pri C
hin
chw
ad
Sang
li
Vas
ai V
irar
Than
e
Nag
pur
Jalg
aon
Nan
ded
Bhi
wan
di
Mir
aBh
ayan
dar
Pune
Ahm
edn
agar
Am
rava
ti
Kol
hapu
r
Ulh
asna
gar
Latu
r
Mal
egao
n
Sola
pur
Nas
hik
Ako
la
Cha
ndra
pur
Dhu
le
Parb
hani
Kal
yan
Dom
bivl
i
Aur
anga
bad
Reliability Grades MCs - Maharashtra
D Grade C Grade B Grade A Grade
Data Reliability Analysis - MCs
All MCs Navi Mumbai PimpriChinchwad Sangli Vasai Virar Thane
A Grade 8 20 15 15 13 12B Grade 4 5 8 4 4 8C Grade 1 0 1 1 1 1D Grade 15 3 4 8 10 7
0
5
10
15
20
25
30
Reliability Grades - All MCs, PCMC, NMMC, Sangli MC, Thane MC, Vasai Virar M
ERP Solution developed internally by NMMC
Birth & Death Certificates
Property / Water Management
GrievanceManagement
Asset Life Cycle Management
Interactive Citizen Portalfor Local Bodies
e-Tendering &Procurement
Office Establishment/Administration
Management Info.SystemLicenses & Permits
Integrated Financial Accounting & Reporting
Workflow Driven Single Sign-on Role-based Access Complete Audit Trail
GIS Integrated systems
DocumentManagement Systems
Automated Building PlanPermissions
Personnel InformationSystems
100
% o
pen
sour
ce E
RP
deve
lope
d
Source: Rao G V (2013), “presentation on NMMC e-Governance system”, MOUD workshop, Khajuraho.
Production, Treatment and Distribution• Bulk flow meters installed at all
points to measure water. production and distribution
• Water produced and distributed monitored through SCADA system (Hourly reports generated).
• Water quality tests conducted daily at own laboratory.
Consumption• Monthly meter readings
through- Automatic meter reader- Manual recording
• Computerized records for water connections, consumption and billing.
• Multiple mechanism to register complaints – written, telephonic, online, etc.
Systems and Processes – Navi Mumbai
Water Supply Wastewater Management Solid Waste Management
Collection and Conveyance• 80.1% coverage of wastewater
network.• Multiple mechanism to register
complaints available – written, telephonic, online, etc.
Treatment• 7 STPs for treatment of
wastewater generated (C-tech technology).
• Bulk flow meters installed at inlets and outlets of STPs
• STPs operated through SCADA system.
Disposal• Treated waste water disposed
into Thane creek.
Collection, transportation and Segregation• Waste collection trucks weighed
at the weighing bridge.• Computerised records are
maintained on the daily basis.• Wet and dry waste is segregated
through mechanical segregators and sent for processing.
Processing• 17500 MT/ Month goes to
processing plant approved by SPCB
- Bio gas plant- Compost processing- RDF- Eco bricks
Disposal• 4500 MT/ Month goes to
dumping site.
Mainstreaming outcome monitoring – Gujarat and Maharashtra
The CEPT Performance Assessment System (PAS) has been mainstreamed in both states through a special State Cell for SLB assessmentThe government resolutions provide terms of reference, time table for regular activities and budget stream of the State Cells
NTS – MoU with MoUD SLB cell Maharashtra SLB cell Gujarat
TFC Condition 8 : Standards for service delivery
Service Level Benchmarking as one of the nine conditionalities for allocation of performance based grants to ULBs, which amount to appr. Rs.8000 crores over 2010-15. This was instrumental in adopting outcome monitoring framework
The TFC stated that, “State governments must put in place standards for delivery of essential servicesprovided by the local bodies for four services viz., water supply, sewerage, solid waste management, and storm water drains on lines of handbook for SLB by MoUD)*
This has provided a beginning of a mindset shift from “infrastructure investments” to “service delivery outcome”.
States with SLB Gazette information
* Andhra Pradesh and Rajasthan – Submitted average service levels and only sample city information ** Mizoram State - Gazetted average service level of 4 ULBs
States No of cities in SLB Gazette information2011 2012 2013
Andhra Pradesh 124 *Bihar 42Chhattisgarh 43 43 43Gujarat 164 167 166Haryana 71 74Himachal Pradesh 48 26Jharkhand 38Karnataka 52 52Kerala 65 65 65Madhya Pradesh 110 110Maharashtra 247 252 252Meghalaya 6Mizoram 4** 4**Odisha 103 40Punjab 132Rajasthan 184 *Tripura 1 1Uttar Pradesh 205 207 207West Bengal 87 125 127Total cities / Total States 1475 / 14 1207 / 15 1070 / 11
Despite the compliance of this condition by a large number of ULBs, a working group report of NIUA suggests discontinuance of this based on a sample of TWO ULBs!! “The data of the two ULBs in respect of the above are contained in the two
tables to show the irrelevance of “Benchmark” as one of the nine conditions as also of the limited value of this information for any purpose”
“The use of decimal point in recording the extent of metering or of non-revenue water shows the lack of understanding by the State how current levels or the targets are to be recorded.”
Such conditions, the Working Group holds the position, need not be considered by the 14th Finance Commission.
We completely disagree with such a recommendation, based on a flimsy footing and poor understanding of the links between outlays and outcomes
Throwing the baby with bath water?
MoUD and NIUA (2013) Approach to the finances of municipalities: A report to the 14th finance commission, A report of the working group, November 2013(para 4.14)
Suggestions to FFC
Promote state level system for regular collection and analysis of municipal finance information
Operationalizing systems for outcome / service delivery monitoring (like Service Level Benchmarks) on a regular basis
Define clear role of state government and urban local bodies in setting up and mainstreaming these systems
Suggestions for the consideration of the FFC
Municipal Finance Information has been paid less attention (unlike the accounting reforms!!)
Rather than ad-hoc, one-time data collection generally undertaken for SFC/FC, there is a need for systematic information on municipal finance
Government of Gujarat is now collecting municipal finance data along with service level data on a regular basis through an online system. These online modules and analysis framework can be adapted for use in other states as well
The Twelfth FC did make a recommendation for ‘data improvements’, but dues to the lack of an incentive and clarity, implementation has been weak
Can FFC provide incentive(s) to make this “mandatory”? And provide grants to support implementation?
Systems for regular collection/analysis of municipal finance
A system of performance measurement with standard indicators for key municipal services is needed. The CEPT University’s PAS Program has adapted GOI’s SLB framework by adding for equity and onsite sanitation systems. Regular assessment of performance is needed by all ULBs, to enable comparative assessment and benchmarking, and trend analysis.
Governments of Gujarat and Maharashtra are now collecting annual service performance data (SLB+) through an online system. MOUD, GOI has asked CEPT University to provide demand-based support to other states. Chhatisgarh, MP and Goa have requested this support so far.
ULBs need to include monitoring of service delivery as a part of their internal systems – linking with their e-governance and MIS. This can begin with a few ULBs. This will help improve data reliability
Can FFC provide incentive(s) to make it “mandatory” state and local governments to set up online systems for monitoring of outcomes and service delivery? And provide grants to support implementation?
Systems for monitoring of outcomes/ service delivery
Both state governments and ULBs have a critical role to play in setting up systems for monitoring of a) municipal finance, and b) outcomes or service delivery performance
State governments need to support setting up online monitoring systems, provide capacity building support to ULBs and provide a platform for comparative assessment, and use the information to make better investment decisions
ULBs need to improve internal systems of monitoring to ensure high reliability of KPIs, and use this in internal monitoring and decision making
How does one incentivize both state and local governments to play their role effectively?
State government and ULB roles
Thank You
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PAS ProjectCEPT University
Ahmedabad 380051 India
Meera Mehta | Dinesh Mehta